5 Overpriced Stocks to Ditch Now

by Lawrence Meyers | November 13, 2013 6:15 am

[1]It isn’t just quantitative easing that is responsible for driving some stocks well beyond their intrinsic value. Many other stocks are overpriced because they are perceived as safe — legacy companies that aren’t likely to experience huge volatility.

The problem? Many of these aren’t truly safe anymore.

Meanwhile, a number of other stocks have just gone way past intrinsic value because of momentum.

It’s the kind of thing that helps a market to 20%-plus returns in less than a year. But it’s the kind of thing that investors need to be aware of, and take action around.

Specifically, if you own any of these overpriced stocks, I’d ditch them now. There are better places to put your money.

Here are five stocks to sell right now:

Bristol-Myers Squibb

Bristol-Myers Squibb (BMY[2]) was once a must-hold pharmaceutical/healthcare stock. Today, it’s a no-growth laggard that does generate good cash flow and a 2.7% yield.

The perception of safety is what drives investors to this stock, and the 2.7% yield isn’t gigantic, but decent enough for a retirement portfolio. The problem is that everyone has bought in using the same criteria, and the stock trades well above any reasonable valuation.

Earnings are expected to fall 12% this year, recover next year and allegedly grow at 10% thereafter. However, even giving the company a 25% premium for having cash and investments equal to debt and generating lots of free cash flow, I see no more than a 13x valuation, or $21 on this year’s earnings.

BMY trades at $53.

Merck & Co.

The only big pharma company that may need to be sold more is Merck & Co. (MRK[3]). It’s in the same boat as BMY, except earnings aren’t even expected to recover next year — staying flat at $3.49 — and long-term growth is a mere 2%.

Yeah, I know you love the 3.8% yield, but the stock is overpriced by more than 3.8%. Again, even if I’m super generous and give an undeserving 9x estimate, the stock isn’t worth much more than $30, and trades at $48.

U.S. Steel

The economy is barely ticking, and holding a commodity producer right now is risky. U.S. Steel (X[4]) is going to report a loss this year, but hey — supposedly it’s going soundly back to profitability next year.

I’m not so sure.

U.S. Steel has $3 billion in debt and is barely generating any FCF[5]. Meanwhile, everyone’s cheering a supposed rebound in steel … but X shares have also rebounded 40% in just a few months, putting the cart before the horse.

At $27, U.S. Steel is trading at a valuation that’s just not supportable.

Netflix

[6]I know there’s a lot of controversy about Netflix (NFLX[7]), but here’s the question to ask yourself after a 300%-plus run this past year — what is the path of least resistance?

When you parse the company’s earnings, you see that NFLX barely generates any free cash flow while having $6 billion in off-balance sheet obligations. True, the company is building out its international operations, but at some point, they have to pay off. Meanwhile, content costs continue to skyrocket thanks to a feeding frenzy between cable companies, Amazon (AMZN[8]) prime and others.

The model isn’t sustainable.

But even if you think it is, Netflix stock is more likely to go down than up. It’s the path of least resistance.

Facebook

[9]Look, I just don’t get it. Facebook (FB[10]) is valued at $113 billion. Net income[11] year-to-date is roughly $1 billion, or a run-rate of $1.33 billion.

Does anyone think Facebook will grow at 90% earnings annually to support this valuation? I just don’t think that’s likely.

More to the point, however, Facebook’s actual business model has always felt muddy to me. It’s all about leveraging eyeballs. It’s effectively an advertising platform, and I ignore the advertisements. I imagine most people do. I wonder how long it’ll be before advertisers realize this.

Of course, if you’re looking for a more concrete fault on the advertising side, how about the fact that it’s reaching critical mass[12]? Its CFO has expressed concerns about how many ads Facebook can run without really peeving its users.

Then there’s the lingering issue of whether Facebook will be the social media tool of choice for the long haul. Remember MySpace?

Too many questions here to support a forward P/E of more than 40.

Read More: 3 Reasons to Give Tech Funds the Ol’ Heave-Ho[13]

As of this writing, Lawrence Meyers[14] did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc.[15], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[16] and blogs about public policy, journalistic integrity, popular culture, and world affairs[17]. Contact him at pdlcapital66@gmail.com[18] and follow his tweets @ichabodscranium.